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Buying 23 fully developed lots - do I need an attorney?

Contractor from Valparaiso , Indiana

posted over 4 years ago

I am going to be purchasing 23 fully developed vacant lots in a subdivision of new construction duplexes. The development was 30 lots total (60 addresses)

I will be purchasing the lots from the bank via short sales. I need to get the partners to agree to my price, which 2 of the 3 have done verbally. I also need the bank to approve the short sale, which they have preliminarily done.

I will also be taking over the current HOA.

This purchase will run thru a title company, and it is my understanding that the utility company no longer holds installation deposits on the lots.

The only issue that comes to mind is that there is a detention pond in the subdivision that requires some repairs according to the town. But Am I buying that? or am I buying individual lots? I need to look into that.

I just want to cover all of my bases here so please tell me why I should have an attorney draft the purchase agreement. I'm not against having one review the documents, but I am not sure why I need one otherwise.

Real Estate Professional from West Palm Beach, Florida

replied over 4 years ago

You're probably experienced with building and know the process much better than me. But I think I,d talk to a local land planning type co that gets developments approved. They'd be familiar with whatever other responsibilities you'd be taking on, like the association may be responsible for maintaining the detention area, impact fees for new construction, etc. I assume you already know if the roads are public or private. A title search now may turn up some easements or deed restrictions you don't know about yet also.

Investor, Entrepreneur, Educator from Springfield, Missouri

replied over 4 years ago

For vacant lots you shouldn't have many legal issues in the PA, I never say you don't need an attorney, but I wouldn't. What you can expect is no guarantee of any kind, a Special Warranty Deed and compliance matters all on you from a bank. The critical issues is with your title policy, review that carefully.

If that detention area has not been deeded to the city, as they can be, it belongs to you. You need an engineer more than an attorney on that.

The short sale will be rather straight forward, it's a principal reduction not really a SS as homeowners would go through, you should be able to review the buyer side without much concern.

If you have legals on each lot the development headaches are pretty much over. Check easements and setbacks to take the type of properties to be built as desired, I'm sure you got that side.

Your legal issue will be to the HOA, I suggest you have that reviewed, initially ensure it is filed and in good standing, but take care in the voting rights, special assessments, common area responsibilities and ensuring FHA compliance for future lending, a PUD.

Contractor from Valparaiso , Indiana

After going thru all of the numbers and details I have come to the conclusion that buying it outright from the bank at the reduced price is the way to go. If I told you guys the interest rate and terms the bank offered me you would call me a liar. I will get into some details on this project in a later post after its closed.

I have significant experience in this field, and I am sure this will be a great earning experience for others,

Investor, Entrepreneur, Educator from Springfield, Missouri

replied over 4 years ago

LOL, no, I could believe the Fed Funds rate, or IBOR.

Wasn't aware of them financing. The issue there is an allocated release fee on each lot. Often if you're looking at a % basis of the balance toward the end you can get into higher release fees as their collateral is reduced, go with a flat dollar amount to amortize to payoff.

You have enough experience to get through common financing arrangements I'm sure. :)

Contractor from Valparaiso , Indiana

The bank has asked me to submit 2 purchase agreements, 1 where I buy the entire subdivision, and 1 where I have an exclusive option on all of the lots and the current owner holds the property in his name.

I have never written an option before, does anyone have a sample of an option contract and look thru/use to write mine. Or advise on this option.

I will of course be willing to pay a bit more per lot thru an option since my risk is substantially lower. I like the idea of not having a $500k note and still being able "own" the subdivision

Investor, Entrepreneur, Educator from Springfield, Missouri

replied over 4 years ago

Chris, a good way to devise an option for this is to look at a purchase contract and take out the default provisions, inspections as there are no improvements as well as insurance matters, set a price at each lot.

You need to state how notice will be given to exercise the option, time period to close each sale.

You'll have title work, settlement, accrued taxes.

I would state a significant option price which would be an amount included in the price for the sub. In the event anything blows up with any option, you'll have more recourse with having a significant option price paid tagged to each lot. You can also adjust tax matters to the sub and the lots to your advantage by stating this aspect.

I don't have a canned boilerplate option, I do things specific to the deal and I suggest you do to, don't use some guru option in this deal with a bunch of carve outs. The term is the big question, it could take years to sell off homes.

I'd also ask for them to subordinate the lot for home construction with your purchase at or just prior to any home sale.

This isn't some small $150K home deal, I suggest you get your attorney involved in these contracts.

Sounds like the bank is working with the owner (who walked off?) This is a great advantage to you not carrying the whole thing. Did the bank take it? If they did say thank you.

Jerry may touch on your ability to change the HOA agreement not having title as well as his advice. That would be an issue to me as the voting in the bylaws is probably vested in the ownership of the lots. You'd be taking a sub with an HOA and no way to modify the bylaws. That's an issue. :)

Contractor from Valparaiso , Indiana

You need to state how notice will be given to exercise the option, time period to close each sale.

I don't know if I understand this line, I will be purchasing lots on a as needed basis from the owners. I will immediately be taking 2 lots, 1 for a pre sold I have and another to build model home. I am under the assumption that by having an exclusive rights option for a given amount of time I am able to exercise my option as needed for that time period. Assuming I meet some type of performance requirement.

I would state a significant option price which would be an amount included in the price for the sub. In the event anything blows up with any option, you'll have more recourse with having a significant option price paid tagged to each lot. You can also adjust tax matters to the sub and the lots to your advantage by stating this aspect.

My prices for the option is going to be about 10% higher that if I purchase the property outright. All of the taxes, maintenance and upkeep to any part of the subdivision will be at the owners expense if I do the option. Or am I wrong in saying this?

I don't have a canned boilerplate option, I do things specific to the deal and I suggest you do to, don't use some guru option in this deal with a bunch of carve outs. The term is the big question, it could take years to sell off homes.

I got a pretty simple option contract from my realtor and I can add addendum's as needed.

I'd also ask for them to subordinate the lot for home construction with your purchase at or just prior to any home sale.

I will be taking closing on the lot and my S corp will hold title during construction. Is that what you mean?

Sounds like the bank is working with the owner (who walked off?) This is a great advantage to you not carrying the whole thing. Did the bank take it? If they did say thank you.

The bank has not foreclosed, they are treating this as a short sale of sorts. The 3rd partner has bought out his personal guarantee, and now the main partner will own 90% of the remaining shares/interest in the property.

I will be running all financing thru the same bank. They are being very reasonable with the remaining owners.

Jerry may touch on your ability to change the HOA agreement not having title as well as his advice. That would be an issue to me as the voting in the bylaws is probably vested in the ownership of the lots. You'd be taking a sub with an HOA and no way to modify the bylaws. That's an issue. :)

As the HOA rules are written, I will have 1 vote for each piece of property I own. So I will have the majority vote. To change or amend a rule in the HOA requires a 2/3 vote. I will control 46 of the 60 votes. I will also have the owner sign that I am in control of the architectural committee.

Investor from Thermopolis, Wyoming

Wow just saw this new thread, congratulations @Chris Adams , it appears you have a great opportunity. My brain is kind of cottage cheese at the moment but let me give some off the cuff thoughts.

First I am positive that your laws are much more exacting and detailed that what I deal with, so knowing every possible nuance of the state, county, and city involved is important. A planner or or attorney who specializes in this area may be a good consultant to talk to before making an offer.

There are pros and cons to owning the whole subdivision, the pros are you are in control and it will probably be easier to get cooperation from local boards if they know you are in charge. Apparently the price would be cheaper too. Read the bylaws VERY carefully. You may want to amend them them and you will need to follow those rules exactly.

The drawback to owning is you would be responsible for any items like parks, infrastructure, or other items they have pledged to do as part of the subdivision. There will also be holding costs and there are always unexpected costs that hit the developer more than the lot owner.

The drawback to only having options is that unless you include a power of attorney to vote the lots in the HOA, you are not in charge. You will not have the holding costs of buying a huge subdivision, but the overall price will be higher. Local boards will not take you very seriously if you do not own the lots, and may say you do not have standing to petition them about the subdivision.

Options are obviously more complicated than purchase agreements. They need a starting date, and a an ending date. They need the details about price, terms, length of the option, is it exclusive, etc. As @Bill Gulley was hinting maybe your option could include that you do not pay for the lot until 6 months after closing so you can already have the house built and construction loan on it.

I see no benefit for the current owner to give you a 10 year exclusive option to purchase with little money down or great terms. Why keep his money tied up? Building and selling 3 lots a year would still mean waiting until 15 years to get them all built and sold.

In any event get a non revocable power of attorney to vote all the lots in question, get anything you need changed now, before any sales. Make sure you have the funding to build and sale several lots at once. That is often a major sticking point.

My brain is mush, I have to go to bed. I will look this over again and try to come up with more information. Good luck bud.

Contractor from Valparaiso , Indiana

I have been doing a lot of work on the option purchase and its not as attractive of a deal that way. My cost per lot jumps $3k-$4k, and I would still have to cover the cost that the owner will incur to hold the property which add up to another $12k/yr.

I will be talking with the bank again on Monday, Maybe they will have some different opinions on how to structure this deal.

Property Manager from Livonia, MI

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